Allergan stock drops on drug delays

Shares of Allergan Inc. fell sharply Wednesday after the Irvine-based pharmaceutical company said it would delay final testing on two of the most promising drugs in its pipeline.

The company's CEO, David Pyott, told analysts and investors that Allergan had decided to prolong intermediate clinical trials of DARPin, a potential blockbuster being tested for the treatment of macular degeneration – a loss of vision caused by retina damage that is most common in elderly people. Pyott also said more testing was needed to determine whether bimatoprost, a substance already approved for treating glaucoma and to thicken eyelashes, can be used to fight hair loss.

The news came shortly after Allergan announced strong first-quarter results, slightly beating market expectations. The company posted quarterly sales of $1.46 billion, up from $1.35 billion a year earlier and around $20 million ahead of street estimates. After excluding one-time factors, earnings per share amounted to 98 cents – two cents above the consensus analyst estimate. Among the one-time factors was a $259 million after-tax write-down on the assets of Allergan's obesity treatment unit, including Lap-Band, which it plans to sell by mid-year.

Revenue from Allergan's marquee product, Botox, made a particularly strong showing in the quarter, rising 14.8% to $457.9 million. Allergan projected total company sales of $6 billion to $6.2 billion for this year, which would be a gain of nearly 7 percent from the $5.8 billion it reported in 2012.

Yet the strong financial picture was overshadowed by the news that DARPin and bimatoprost would be delayed.

Allergan's stock price fell by as much as 15% at one point in the day, before recovering slightly to close 13.1 percent lower at $98.67.

Pyott said researchers had been able to demonstrate some differentiation between DARPin and the leading drug on the market, Lucentis, which is sold by Genentech. But the data were not strong enough to justify moving to the final clinical trial, which he said "will be the most expensive in our history," costing hundreds of millions of dollars.

"The bottom line in all of this is that we are always cautious and balanced in our approach," Pyott said. "It's always better to hit the pause button to increase the probability of long-term success."

But Pyott didn't completely conceal his enthusiasm, estimating that DARPin, together with a separate but related compound soon to be tested for the same condition, could eventually generate an additional $3 billion to $4 billion in new revenue – if "the data line up."

For now, however, the decision to extend testing means federal approval of DARPin is unlikely to happen before 2019.

In the case of bimatoprost, the tests showed that it produced insufficient hair growth, so Allergan decided to extend the mid-term trial and to increase the dose given tenfold. "Clearly we've got to be better than Rogaine, otherwise you've just got a cheap generic Rogaine, and that's just not a business proposition from where I sit," Pyott said.

David Amsellem, a senior pharmaceuticals researcher at the investment bank Piper Jaffray & Co., said the reason the stock market reacted so harshly to the news of the twin testing delays is that it had been fueled by "over-exuberance around assets that were still highly speculative." The delay "creates a real conundrum for the company about how to fill its late-stage pipeline," he said. "Now, they have some holes they really have to fill."

Pyott vigorously disagreed.

"As of last week, we had the strongest pipeline in the industry and suddenly this week we have the weakest? This is just people going from left to right and right to left," he said. There is plenty of new product research going on at Allergan, he said, noting that the company's budget for research and development is $1 billion and will rise to $1.5 billion within five years.

He pointed to other analysts who argued that Wednesday's stock market move was overdone and provided a good buying opportunity.

The Allergan CEO also noted that some very good news for the company had been obscured by its plummeting share price.

An appeals court Wednesday upheld the company's patent for Combigan, a glaucoma drug that accounts for about $200 million in annual sales.

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